The Disintegration of the Golden Era in the Golden State

The New York Times

by Andrés Martinez

February 9, 2003

SANTA MONICA, Calif. -- John Deasy, the superintendent of one of the state's most affluent school districts, clearly knew the figures, but he couldn't help but look for them on the sheet before him, as if to make sure this hadn't all been an unpleasant dream. The numbers are that dire. California's budget crisis will soon force Mr. Deasy to terminate more than 200 of the Santa Monica-Malibu Unified School District's 900 employees, including 102 teachers. There will be no more school nurses and no more elementary school music programs. High school classrooms will be crammed with up to 40 students.

"It's disastrous. This district is going to know times it hasn't known before," Mr. Deasy said last Thursday, as he steeled himself to review the budget cuts at a public school board meeting. "This whole state is going to know times it hasn't known before."

Residents along this picturesque coastline on the fringe of Los Angeles may yet prop up their schools through private fund-raising, but there is less hope for poorer districts across the state, not to mention for imperiled investments in everything from transportation to health care. Moreover, California's budget crisis now threatens the state's overall economic recovery. Yet surprisingly, there is little discussion about how the state's coffers can better endure another dot-com-like boom-and-bust cycle in the future.

On Thursday, California state officials were in Manhattan, trying to convince skeptical credit-rating firms that the state is making progress in getting its finances in order. With California's projected $35 billion budget shortfall over the next year and a half, by far the bleakest outlook for any state, Moody's is considering lowering its rating on a par with New York and Louisiana. Wall Street's skepticism is justified. Mired in a partisan stalemate, Sacramento doesn't seem capable of resolving its fiscal mess. Things are so bad you almost expect the International Monetary Fund to get involved.

California's political leadership is in a state of denial. Republican legislators blindly oppose any tax increase, while some of Gov. Gray Davis's fellow Democrats jostle with him about the extent of the spending cuts needed. Mr. Davis has proposed a tough $24.4 billion package of spending cuts and tax increases. The governor would impose two new double-digit marginal income-tax rates for the wealthiest taxpayers (who would forward a portion of their federal tax cut on to Sacramento) and increase the sales tax by a cent. But he is threatening to veto a plan by Democrats to restore vehicle registration fees to their 1998 level (when they were slashed by two-thirds).

The governor feels this strategy will help him gain the support of some Republicans for his overall package. That seems unlikely, given the increasingly entrenched positions on either side of tax issues, according to Lenny Goldberg, the executive director of the California Tax Reform Association. Along with term limits, the latest reapportionment of legislative districts, which cut down on the number of competitive seats that might favor moderate candidates, has furthered this division. It is a trend also discernible in Washington. In California, Mr. Goldberg says, "the voters will ultimately have to help us break the present stalemate."

That would be fitting, since Californians helped to get their state into this fix. Since the 1978 triumph of Proposition 13, which signaled the rise of a grass-roots antitax movement that helped send Ronald Reagan to the White House, populist initiatives have been an impediment to sound, long-term policy making in the state. By freezing local property taxes and imposing an onerous requirement that any other new tax be approved by a two-thirds' majority of lawmakers, Proposition 13 has starved California of needed investment capital. It also gave large commercial properties an unintended tax advantage that needs to be addressed, and it forever muddled questions of local versus state responsibilities. Subsequent initiatives earmarking revenues or approving new programs without any regard to their cost have further curtailed the government's discretion.

Popular sovereignty has become so much a part of California's political DNA, according to Bruce Cain, the director of the Institute of Governmental Studies at the University of California, Berkeley, that there is little use in trying to abolish the initiative process or to limit "ballot-box budgeting." (He used to try.) Voters will have to amend their past mistakes, for example, by passing initiatives to lift the two-thirds' legislative majority required for new taxes.

In the meantime, California remains heavily dependent on state income taxes. The Legislature seems almost nonchalant about the loss of all the taxable capital gains once generated by Silicon Valley. The late 1990's bull market and the large concentration of option-rich high-tech workers in California lifted state personal income tax receipts from $28 billion in 1997-1998 to $45 billion in 2000-2001. They fell back to $34 billion in 2001-2002. Personal income tax receipts now account for roughly half the state's general fund revenues, compared with only 18 percent in 1962-1963.

California treated these windfalls as ordinary revenue that could pay for an infinite number of new programs. The politicians in Sacramento were not alone in their irrational exuberance. As Professor Cain noted ruefully, many of his students left Berkeley before collecting a degree in hopes of cashing in on the dot-com boom. Many of them are now unemployed.